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Funded Exposures
When bank loans are funded, there is exposure to "funding gaps" for the bank, for instance:
- "Borrowing short but lending long" occurs in more standard loans when the bank is paying floating interest rates to obtain funding, but lending at fixed rates or vice-versa.
- Less common are losses resulting when a bank pays a higher interest rate for funds based on one index (the interest rate prevailing in a particular market, e.g., LIBOR, the London Inter-Bank Offered Rate) than the rate it is earning based on another index (e.g., the banker's acceptance rate).
- In international transactions, there is also a major potential funding gap if funds are borrowed in one currency but lent in another (by purchasing the currency to be lent in the spot foreign exchange market).